United States v. Barbara Coney , 689 F.3d 365 ( 2012 )

Case: 11-30387 Document: 00511932132 Page: 1 Date Filed: 07/24/2012
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit
FILED
July 24, 2012
No. 11-30387 Lyle W. Cayce
Clerk
UNITED STATES OF AMERICA,
Plaintiff-Appellee
v.
BARBARA SUSAN CONEY, also known as Barbara Susan Chenoweth Coney,
Individually and in her capacity as Executrix of the Succession of Curtis John
Coney, Jr.,
Defendant-Appellant
Appeals from the United States District Court
for the Eastern District of Louisiana
Before GARZA, DENNIS, and HIGGINSON, Circuit Judges.
EMILIO M. GARZA, Circuit Judge:
The Government filed suit against Defendant-Appellant, Barbara Coney,
to reduce to judgment the tax liability owed by Barbara and her deceased
husband, Curtis, for the tax years 1996–2001. The district court granted
summary judgment in favor of the Government and rendered judgment in the
amount of $2,687,408.59. Barbara appeals, primarily claiming that the couple’s
tax liability had been discharged in a prior bankruptcy proceeding. We
AFFIRM.
Case: 11-30387 Document: 00511932132 Page: 2 Date Filed: 07/24/2012
No. 11-30387
I
Curtis was the sole shareholder of CLS, Inc. (“CLS”), a law firm that
primarily represented plaintiffs seeking to recover damages arising from
automobile accidents. Because CLS was a Subchapter S corporation, Curtis and
Barbara were required to report the firm’s income on their joint income tax
returns, regardless of whether that income was actually distributed to them
during the tax year. See Nail v. Martinez, 391 F.3d 678, 683 (5th Cir. 2004);
Green v. Comm’r of Internal Revenue, 963 F.2d 783, 786 (5th Cir. 1992).
The present action concerns the Coneys’ joint income tax liabilities for the
1996–2001 tax years. The Coneys did not enter into an installment agreement
with respect to those liabilities. The couple was required to make estimated tax
payments for the relevant years, see 26 U.S.C. § 6654(d), but they did not make
all or part of their estimated tax payments during any of those years. Further,
although the Coneys did file a joint tax return for each of the relevant years,
they did not pay the balance of their tax liability when filing their returns.
Similarly, throughout the relevant tax years, Curtis consistently withheld
insufficient amounts of tax from his income to meet his personal income tax
liability. In total, the Coneys reported $7,503,795 of income on their joint
returns for the tax years 1996 to 2001. Of this total, $1,418,584 was paid to
Curtis in the form of wages; the remainder was income earned by CLS that was
required to be included on the Coneys’ personal returns. Because the Coneys
failed to tender payment of the balance of their tax liability when filing their
returns, the couple’s returns declared that they owed at the time of filing a total
of $1,619,951 to the Internal Revenue Service (“IRS”) for the relevant years.
The IRS assessed the outstanding taxes reported on the Coneys’
1996–2001 returns, along with interest and penalties. Beginning in 1997, the
IRS also began to file liens in the public record to secure the couple’s tax
liabilities. The Coneys retained an attorney to assist them with negotiating a
2
Case: 11-30387 Document: 00511932132 Page: 3 Date Filed: 07/24/2012
No. 11-30387
second installment agreement with the IRS.1 As part of that representation, the
Coneys’ attorney provided the IRS with a list of CLS’s pending cases and advised
the agency that the couple would use the firm’s fees from those cases to pay
down the balance of the couple’s 1994 and 1996 tax liabilities. However,
subsequent bank records show that the couple did not use a $245,000 fee that
the firm received from one of the listed cases in 2001 to pay down the couple’s
tax liabilities.
During the relevant tax years, CLS engaged in a high volume of cash
transactions. Between 1998 and 2001, CLS employees made cash withdrawals
totaling $2,116,929 from the firm’s operating account, nearly 30% of the firm’s
gross receipts during the period. Throughout the relevant tax years, Curtis used
some of this cash to pay illegal kickbacks to “runners” in exchange for client
referrals. In an effort to conceal the illegal kickbacks from the Government,
Curtis instructed CLS’s staff from 1997 to 2001 to write checks to cash, either
singly or in the aggregate, in amounts less than $10,000 per day. When a
depositor withdraws more than $10,000 in currency during one business day, 31
U.S.C. § 5313(a) and its implementing regulations require financial institutions
to file a report with the Commissioner of Internal Revenue. See 31 C.F.R. §§
1010.306(a)(3), 1010.311, 1010.313. Structuring cash transactions to avoid the
reporting requirements is a crime. 31 U.S.C. § 5324(a)(3), (d).
Eventually, a federal grand jury was empaneled to investigate possible
criminal behavior on the part of various parties involved in the litigation of
1
The Coneys, particularly Curtis, have a history of unpaid tax liabilities. From 1991
to 1995, the IRS filed three federal tax liens against Curtis—the 1995 lien was also filed
against Barbara since the couple appeared to have married during the 1994 tax year—to
secure significant outstanding tax liabilities for the tax years 1988, 1989, 1990, 1992, and
1994. In 1994, Curtis entered into an installment agreement with the IRS, in which he
promised to pay $10,000 per month, plus 60% of his firm's case proceeds, minus expenses,
until he paid off his liabilities for the tax years 1989, 1990, and 1993, which then totaled
$655,468. The agreement also required Curtis to use the remaining 40% of the firm’s case
proceeds, minus expenses, to make estimated tax payments to the IRS for future tax years.
3
Case: 11-30387 Document: 00511932132 Page: 4 Date Filed: 07/24/2012
No. 11-30387
personal injury cases in Louisiana. Kathy Martino, a legal assistant employed
by CLS, was subpoenaed to testify to the grand jury. Curtis had previously
instructed Martino to write checks to cash on the firm’s account in a manner
that would avoid the federal currency transaction reporting requirements. After
learning that Martino had been subpoenaed to testify, Curtis and Barbara asked
Martino to meet with them at their home. At the meeting, which was recorded
by Martino with the assistance of federal agents, both Curtis and Barbara
“sought to influence Ms. Martino’s grand jury testimony by urging her to testify
falsely to the grand jury.” In particular, both Coneys instructed Martino “to
feign ignorance in response to any grand jury questions regarding the specific
operations of [CLS], including using runners and paying them through
structured transactions.”
In October 2002, the grand jury returned an indictment charging Curtis
with (a) one count of conspiracy to structure financial transactions in violation
of 31 U.S.C. § 5324 from 1997 to 2001, (b) ten counts involving ten separate
incidents of structuring financial transactions in violation of 31 U.S.C. § 5324from 1997 to 2001, and (c) one count of obstruction of justice for attempting to
influence Martino’s grand jury testimony. The grand jury also returned an
indictment charging Barbara with one count of obstruction of justice for
attempting to influence Martino’s grand jury testimony. In 2003, Curtis and
Barbara pleaded guilty to all the counts charged against them. In the factual
basis supporting their pleas, the couple admitted that Curtis had specifically
instructed Martino “never to write checks to cash on the law firm’s operating
account amounting to more than $10,000 in one day so as not to trigger the
statutory reporting requirements.” The couple also admitted that Martino paid
the runners at the direction and instructions of Curtis “and with the full
knowledge of his wife, Barbara.”
4
Case: 11-30387 Document: 00511932132 Page: 5 Date Filed: 07/24/2012
No. 11-30387
In April 2005, the IRS notified the Coneys of its intent to levy on the
couple’s assets to collect their outstanding liabilities for the tax years 1996–1998.
A few months later, the Coneys filed a petition for Chapter 7 bankruptcy relief.
The bankruptcy court eventually entered an order granting the Coneys a
discharge of their debts under 11 U.S.C. § 727. The couple did not seek a
determination of whether their tax liabilities were dischargeable, and the
bankruptcy court closed the bankruptcy case.
After the bankruptcy court entered the discharge order, the Government
filed the instant suit to reduce the Coneys’ unpaid tax assessments to judgment.
Curtis died while the case was pending in the district court, so the court
substituted Barbara as a party in her capacity as executrix of Curtis’s estate, in
addition to her status as defendant in her individual capacity. The Government
moved for summary judgment, contending that the Coneys’ tax liabilities were
excepted from the bankruptcy court’s discharge order under 11 U.S.C. §
523(a)(1)(C). Section 523(a)(1)(C) provides that “[a] discharge under section 727
. . . of this title does not discharge an individual debtor from any debt . . . for a
tax . . . with respect to which the debtor . . . willfully attempted in any manner
to evade or defeat such tax.” The Coneys opposed the motion, asserting that the
taxes were not excepted from discharge under § 523(a)(1)(C).
The district court granted the Government’s motion for summary
judgment, holding that the Coneys’ tax liabilities for the relevant tax years were
not dischargeable. The district court concluded that the Coneys had willfully
attempted to evade and defeat their tax debts by knowingly and intentionally (1)
“structur[ing] the runner transactions to evade the [federal currency transaction
reporting requirements], the natural and inescapable consequences of which was
to conceal those substantial cash transactions from the IRS” and (2)
“attempt[ing] to influence a grand jury witness to conceal the structuring
scheme, which itself concealed the existence of the cash transactions from the
5
Case: 11-30387 Document: 00511932132 Page: 6 Date Filed: 07/24/2012
No. 11-30387
IRS.” United States v. Coney, No. 08–1628, 2011 WL 1103631, at *6 (E.D. La.
Mar. 22, 2011). After receiving proposed orders from the parties regarding the
proper calculation of interest, the district court rendered judgment for the
Government in the amount of $2,687,408.59, plus post-judgment interest. This
appeal followed.
II
On appeal, Barbara claims that the district court erred by concluding that
she and Curtis willfully attempted in any manner to evade or defeat the
payment of their taxes for the relevant years. She contends that the
Government failed to establish that either of the Coneys (1) committed an
affirmative act in violation of their duty to pay taxes or (2) willfully committed
such an affirmative act. Alternatively, Barbara asserts that even if the
Government met its burden as to Curtis under § 523(a)(1)(C), the Government
did not establish that she willfully attempted to evade taxation. She also
contends that even if the district court did not err in granting summary
judgment for the Government, the court erred by awarding a money judgment
in an improper amount.
We review a grant of summary judgment de novo, applying the same
standard as the district court. Harrigill v. United States, 410 F.3d 786, 789 (5th
Cir. 2005). “Summary judgment is proper when the record, viewed in the light
most favorable to the nonmoving party, demonstrates that no genuine issue of
material fact exists and that the movant is entitled to judgment as a matter of
law.” Id. (citing FED. R. CIV. P. 56(c); Blow v. City of San Antonio, 236 F.3d 293,
296 (5th Cir. 2001)).
A
“When a Chapter 7 debtor obtains bankruptcy relief, the general rule is
that all debts arising prior to the filing of the bankruptcy petition will be
discharged.” In re Bruner, 55 F.3d 195, 197 (5th Cir. 1995) (citing 11 U.S.C. §
6Case: 11-30387 Document: 00511932132 Page: 7 Date Filed: 07/24/2012
No. 11-30387
727(b)). However, to ensure that the Bankruptcy Code’s “fresh start” policy is
only available to “honest but unfortunate debtor[s],” Congress has provided that
certain types of liabilities are excepted from the general rule of discharge. In re
Fretz, 244 F.3d 1323, 1326–27 (11th Cir. 2001) (quoting Grogan v. Garner, 498
U.S. 279, 286–87 (1991)); see also Bruner, 55 F.3d at 197. We strictly construe
exceptions to the general rule of discharge in favor of the debtor, In re Cross,
666 F.2d 873, 879–880 (5th Cir. 1982); see also Fretz, 244 F.3d at 1327 (collecting
cases), and the party arguing against dischargeability bears the burden of
proving the application of an exception by a preponderance of the evidence. In
re Grothues, 226 F.3d 334, 337 (5th Cir. 2000).
11 U.S.C. § 523(a)(1)(C) is one such exception. It provides:
(a) A discharge under section 727 . . . of this title does not discharge an
individual debtor from any debt—
(1) for a tax . . .—
(C) with respect to which the debtor made a fraudulent
return or willfully attempted in any manner to evade or
defeat such tax[.]
11 U.S.C. § 523(a)(1)(C).
Section 523(a)(1)(C) creates two exceptions to discharge—when a debtor
files a fraudulent return and when a debtor “willfully attempt[s] in any manner
to evade or defeat [a] tax.” The central issue in this appeal is whether the
district court properly determined that both Coneys “willfully attempted” to
evade or defeat their taxes for the relevant tax years.
Although we have not previously had to explicitly address the issue, we
agree with our sister circuits that the plain language of the “willfully attempted”
exception “contains a conduct requirement (that the debtor ‘attempted in any
manner to evade or defeat [a] tax’), and a mental state requirement (that the
attempt was done ‘willfully’).” Fretz, 244 F.3d at 1327 (citing In re Fegeley, 118
7
Case: 11-30387 Document: 00511932132 Page: 8 Date Filed: 07/24/2012
No. 11-30387
F.3d 979, 983 (3d Cir. 1997)). Because Barbara contends that the district court
applied the wrong standard when deciding the dischargeability issue under both
the conduct and the mental state prongs, we begin by determining the proper
standard under each.
1
First, Barbara asserts that the district court misinterpreted our opinion
in Bruner and applied the wrong standard when analyzing whether the Coneys’
actions satisfied the conduct requirement of § 523(a)(1)(C). She claims that the
conduct prong required the Government to establish that the Coneys committed
“affirmative acts in contravention of their duty to pay [their] taxes.” In short,
Barbara asserts that because the Coneys filed accurate tax returns, attempted
to pay their taxes to the best of their abilities, and did not conceal their income
or assets, the couple did not engage in conduct that constituted an attempt to
evade or defeat their taxes.
We disagree with Barbara’s analysis of § 523(a)(1)(C)’s conduct
requirement. Her argument implicitly assumes that a willful attempt to evade
or defeat taxes must consist of an attempt to evade the assessment of taxes
rather than the payment or collection thereof. Although we have not previously
addressed the validity of her assumption, the bulk of federal authority
considering the issue has held that § 523(a)(1)(C)’s conduct requirement applies
equally to attempts to evade or defeat the collection and payment of a tax. See
In re Griffith, 206 F.3d 1389, 1395–96 (11th Cir. 2000) (en banc) (overturning
In re Haas, 48 F.3d 1153 (11th Cir. 1995), in part, and holding that the conduct
requirement of § 523(a)(1)(C) is satisfied where debtors engage in affirmative
acts to avoid payment or collection of taxes); Dalton v. I.R.S., 77 F.3d 1297, 1301
(10th Cir. 1996) (holding that conduct requirement includes attempts to conceal
assets to avoid the payment or collection of taxes). For the following reasons, we
agree with the majority position.
8
Case: 11-30387 Document: 00511932132 Page: 9 Date Filed: 07/24/2012
No. 11-30387
We begin, as we must, with the plain language of § 523(a)(1)(C). See
Carder v. Cont’l Airlines, Inc., 636 F.3d 172, 175 (5th Cir. 2011). The statute
excepts “such taxes” from discharge that the debtor “willfully attempted in any
manner to evade or defeat.” 11 U.S.C. § 523(a)(1)(C) (emphasis added). By using
the unqualified phrase “in any manner” to modify a debtor’s “willful attempts”
to evade or defeat his taxes, the plain language of the statute suggests that
“willful attempts” under § 523(a)(1)(C) include attempts to evade or defeat the
payment or collection of a tax. See Dalton, 77 F.3d at 1301 (“[T]he modifying
phrase ‘in any manner’ is sufficiently broad to include willful attempts to evade
taxes by concealing assets to protect them from execution or attachment.”)
(quoting In re Jones, 116 B.R. 810, 814 (Bankr. D. Kan. 1990)). The plain
language of the statute offers no reason to conclude that “willful attempts” only
refer to attempts to evade the assessment of tax, but not the collection or
payment thereof.
This broad reading of § 523(a)(1)(C) comports with the manner in which
federal courts have interpreted similar language in the Internal Revenue Code.
See Spies v. United States, 317 U.S. 492, 499 (1943) (interpreting the predecessor
of 26 U.S.C. § 7201, which criminally sanctioned “[A]ny person who willfully
attempts in any manner to evade or defeat any tax imposed by this title or the
payment thereof . . . .”); id. (“Congress did not define or limit the methods by
which a willful attempt to defeat and evade might be accomplished and perhaps
did not define lest its effort to do so result in some unexpected limitation. Nor
would we by definition constrict the scope of the Congressional provision that it
may be accomplished ‘in any manner.’”).2
2
We acknowledge that unlike 26 U.S.C. § 7201 and similar tax provisions, 11 U.S.C.
§ 523(a)(1)(C) does not disjunctively refer to both attempts “to evade or defeat any tax or the
payment thereof.” 26 U.S.C. § 7201 (emphasis added). The absence of such “payment thereof”
language in § 523(a)(1)(C) originally persuaded the Eleventh Circuit in Haas to hold that the
subsection did not apply to attempts to evade or defeat the collection or payment of taxes.
9
Case: 11-30387 Document: 00511932132 Page: 10 Date Filed: 07/24/2012
No. 11-30387
Further, the surrounding statutory language buttresses our interpretation
of the conduct requirement because a contrary ruling would render the language
creating the “willfully attempted” exception from discharge largely superfluous.
See Hibbs v. Winn, 542 U.S. 88, 101 (2004) (“[W]e follow ‘the cardinal rule that
statutory language must be read in context since a phrase gathers meaning from
the words around it.’”) (citation omitted); id. (“A statute should be construed so
that effect is given to all its provisions, so that no part will be inoperative or
superfluous, void or insignificant.”) (citation omitted). In particular, other
portions of § 523(a)(1) specifically except tax debts from discharge with respect
to which the debtor did not file a required return, 11 U.S.C. § 523(a)(1)(B)(I), or
“made a fraudulent return.” Id. § 523(a)(1)(C). Thus, if we were to interpret the
conduct requirement to only apply to attempts to evade or defeat the assessment
of tax, it is not clear what purpose the relevant language would serve; it is
difficult to conceive how a debtor could willfully attempt to evade the assessment
of a tax other than by failing to file or filing a fraudulent tax return. Griffith,
206 F.3d at 1395; Dalton, 77 F.3d at 1301.
Moreover, construing the conduct requirement in § 523(a)(1)(C) to apply
to attempts to evade or defeat the payment or collection of taxes is supported by
the “basic policy animating the Code of affording relief only to an ‘honest but
unfortunate debtor.’” See Cohen v. de la Cruz, 523 U.S. 213, 217 (1998)
Griffith, 206 F.3d at 1394. However, as noted above, the Eleventh Circuit has overruled that
holding. Id. at 1395–96. We likewise decline to follow Haas because limiting “willful
attempts” under § 523(a)(1)(C) to attempts to evade the assessment of tax would render the
subsection superfluous and undermine the statute’s purpose of reserving discharge for honest
but unfortunate debtors. See infra. Moreover, we have previously declined to interpret the
Internal Revenue Code and Bankruptcy Code in the same manner when interpreting §
523(a)(1)(C), undermining any inferences that we could draw from the absence of “payment
thereof” language in § 523(a)(1)(C). See Bruner, 55 F.3d at 200 (“We are not convinced that
the language of the Internal Revenue Code must be interpreted the same as that of the
Bankruptcy Code. Both are very complex regulatory schemes with careful balances of different
and competing policies.”).
10
Case: 11-30387 Document: 00511932132 Page: 11 Date Filed: 07/24/2012
No. 11-30387
(describing policy of Bankruptcy Code) (citations omitted). “[A]ny statutory
interpretation of ‘evade or defeat’ which relieves the dishonest debtor who
conceals assets to avoid the payment or collection of taxes, but which penalizes
the same dishonesty to avoid assessment, would be an absurd result.” Dalton,
77 F.3d at 1301.
Lastly, our interpretation of the conduct requirement does not conflict with
our prior holding in Bruner. Although in Bruner we distinguished the Bruners’
actions from those of the debtor in Haas on the grounds that the Bruners “were
involved in much more flagrant conduct aimed at avoiding even the imposition
of a tax assessment against them,” Bruner, 55 F.3d at 200, we did not hold that
the conduct requirement only applied to attempts to evade the assessment of tax.
Indeed, in Bruner we appeared to have determined that the Bruners’ tax debts
were ineligible for discharge, in part, because they had engaged in conduct that
could be construed as attempts to avoid payment or collection of tax. See id.(“Moreover, they apparently conducted an inordinate number of cash
transactions and even created a shell entity designed to conceal their income and
assets.”).
Accordingly, we hold that the conduct requirement of § 523(a)(1)(C)
includes willful attempts to evade or defeat the payment or collection of taxes,
in addition to their assessment.3
2
Second, Barbara asserts that the district court applied an improper
standard when determining that the Coneys’ actions satisfied § 523(a)(1)(C)’s
mental state requirement—i.e., that their attempts to evade or defeat their taxes
3
As in Bruner, because we hold that both Coneys willfully engaged in affirmative acts
to avoid collection and payment of their taxes, we need not determine whether (1) their actions
amounted to “culpable omissions,” Bruner, 55 F.3d at 200 (concluding that “[§] 523(a)(1)(C)
surely encompasses both acts of commission as well as culpable omissions”), or (2) “mere non-
payment” of tax is sufficient to preclude discharge. Id.
11
Case: 11-30387 Document: 00511932132 Page: 12 Date Filed: 07/24/2012
No. 11-30387
were done “willfully.” Barbara concedes that Curtis directed his employees to
structure transactions to avoid federal currency reporting requirements and that
they both attempted to interfere with the grand jury’s investigation of Curtis’s
activities; however, she alleges that those actions did not satisfy § 523(a)(1)(C)’s
mental state requirement because neither Coney took those actions with the
specific intent to evade or defeat their taxes. In short, she asserts that §
523(a)(1)(C)’s mental state prong requires that a debtor take an action with the
specific intent to “thwart” the IRS’s efforts to assess, collect, or secure payment
of a debtor’s taxes.
We disagree. Our sister circuits have uniformly concluded that “a debtor’s
attempt to avoid his tax liability is considered willful under § 523(a)(1)(C) if it
is done voluntarily, consciously or knowingly, and intentionally,” and have
declined to require that a debtor engage in such an attempt with the specific
intent to defraud the IRS. Fretz, 244 F.3d at 1330 (citing In re Tudisco, 183 F.3d
133, 137 (2d Cir. 1999); Fegeley, 118 F.3d at 984; In re Birkenstock, 87 F.3d 947,
952 (7th Cir. 1996); Dalton, 77 F.3d at 1302; In re Toti, 24 F.3d 806, 809 (6th Cir.
1994)). We implicitly adopted that position in Bruner by applying the three-part
test for civil willfulness under the Internal Revenue Code to determine whether
the debtors in that case “willfully attempted” to evade or defeat their taxes. See
Bruner, 55 F.3d at 197, n.4; see also Fegeley, 118 F.3d at 984 (declining to
interpret the willfulness language in § 523(a)(1)(C) “consistently with the
criminal provisions of the Internal Revenue Code,” which require proof of fraud);
Toti, 24 F.3d at 809 (holding “that the definition of ‘willfully attempted to evade’
was consistent with the definition found in other civil tax cases, which equates
‘willful’ with voluntary, conscious, and intentional evasions of tax liabilities”)
(citations omitted).
Accordingly, all the Government has to establish in order to satisfy §
523(a)(1)(C)’s mental state requirement is that the debtor (1) had a duty to pay
12
Case: 11-30387 Document: 00511932132 Page: 13 Date Filed: 07/24/2012
No. 11-30387
taxes under the law, (2) knew he had that duty, and (3) voluntarily and
intentionally violated that duty. Bruner, 55 F.3d at 197; Fretz, 244 F.3d at 1330.
To satisfy the third prong of this test, the Government need only establish that
a debtor voluntarily and intentionally committed or attempted to commit an
affirmative act or culpable omission that, under the totality of the circumstances,
constituted an attempt to evade or defeat the assessment, collection, or payment
of a tax; the debtor need not have made their attempt with the specific intent to
defraud the IRS. See Fretz, 244 F.3d at 1330 (holding that the willfulness
language in § 523(a)(1)(C) does not require fraudulent intent) (citing Fegeley, 118
F.3d at 984); Birkenstock, 87 F.3d at 952 (“This willfulness requirement prevents
the application of the exception to debtors who make inadvertent mistakes,
reserving nondischargeability for those whose efforts to evade tax liability are
knowing and deliberate.”).
B
1
Applying these standards to Curtis, we conclude that he willfully
attempted to evade or defeat his tax liabilities for the 1996–2001 tax years under
§ 523(a)(1)(C).
First, given the context of Curtis’s interactions with the IRS, we hold that
his attempts to (1) structure cash transactions to avoid federal reporting
requirements and (2) obstruct the Government’s investigation of his activities
satisfied § 523(a)(1)(C)’s conduct requirement. Specifically, while the Coneys
were incurring significant unpaid tax liabilities, attempting to negotiate
payment plans with the IRS, and seeking to stave off collection proceedings by
promoting the continued viability of Curtis’s law firm to the IRS, Curtis was
directing his employees to engage in a high volume of cash transactions and to
illegally structure those transactions in a manner that would hide them from the
Government. Further, Curtis appeared to have ordered the bulk of these
13
Case: 11-30387 Document: 00511932132 Page: 14 Date Filed: 07/24/2012
No. 11-30387
transactions in order to acquire cash to illegally pay runners to generate cases
for his firm—payments which Curtis contends he did not deduct from income on
his tax returns as business expenses.
Under these circumstances, we agree with the district court that Curtis’s
efforts to circumvent the federal currency transaction reporting requirements
defeated the IRS’s ability to collect his tax liabilities and therefore constituted
attempts to evade or defeat collection and payment of his taxes. As a general
matter, the currency transaction reports provide the IRS with a valuable tool in
pursuing the collection and payment of delinquent tax liability. The Bank
Secrecy Act (“BSA”) and its implementing regulations require financial
institutions to send a report to the IRS when a depositor withdraws more than
$10,000 in currency during one business day. See 31 U.S.C. § 5313(a); 31 C.F.R.
§§ 1010.306(a)(3), 1010.311, 1010.313. Congress enacted the BSA, in part,
because it was concerned with the problem of tax evasion. Ca. Bankers Ass’n v.
Schultz, 416 U.S. 21, 27–29 (1974). Moreover, Congress has found and the
Secretary of the Treasury has determined that currency transaction reports
“have a high degree of usefulness in . . . tax . . . investigations or proceedings.”
12 U.S.C. § 1829b; 31 C.F.R. § 1010.301.
Although not every attempt to avoid the currency transaction reporting
requirements may constitute an attempt to evade or defeat a tax, we conclude
that Curtis’s structuring activities satisfied the conduct requirement.
Specifically, given the high volume of cash transactions performed at Curtis’s
instructions, the illegal purpose for which Curtis used much of that cash, the
Coneys’ significant outstanding tax liability during the years in question, and
the Coneys’ attempt to forestall collection of their tax debts by highlighting the
prospects of Curtis’s law firm, the currency transaction reports would have been
particularly relevant to the IRS in this case. If the IRS had received reports
notifying it of the volume of cash withdrawals from CLS’s operating account that
14
Case: 11-30387 Document: 00511932132 Page: 15 Date Filed: 07/24/2012
No. 11-30387
were not being deducted as business expenses, it is reasonable to conclude that
the IRS would have investigated and instituted collection proceedings years
earlier. At the very least, the broad scope and five-year duration of Curtis’s
structuring activities allowed him to shift significant assets out of the couple’s
possession in a manner that concealed the movement from the IRS and has
prevented the agency from tracing how those assets were used, thereby further
thwarting the agency’s efforts to collect his tax liabilities. Similarly, Curtis’s
attempt to derail the grand jury investigation of his activities formed a further
effort to conceal his structuring crimes and the underlying illegal runner
payments; thus his obstruction of justice offense constituted an additional
attempt to evade or defeat the payment or collection of his taxes.
Accordingly, we hold that Curtis’s attempts to avoid the currency
transaction reporting requirements and to obstruct the Government’s
investigation of his activities were affirmative acts to evade or defeat the
collection and payment of his tax liabilities for the relevant tax years. See Fretz,
244 F.3d at 1329 (“The conduct requirement is satisfied, however, where a
debtor engages in affirmative acts to avoid payment or collection of taxes . . . .”)
(citation omitted).
We also conclude that Curtis engaged in his attempts to evade or defeat
the collection or payment of his taxes with the requisite mental state under §
523(a)(1)(C)—willfully. To satisfy § 523(a)(1)(C)’s mental state requirement, the
Government had to establish that Curtis (1) had a duty to pay taxes under the
law, (2) knew he had that duty, and (3) voluntarily and intentionally violated
that duty. Bruner, 55 F.3d at 197; Fretz, 244 F.3d at 1330. To satisfy the third
prong of this test, a debtor need only voluntarily and intentionally commit or
attempt to commit an affirmative act or culpable omission that, under the
totality of the circumstances, constituted an attempt to evade or defeat the
assessment, collection, or payment of a tax; the debtor need not have made his
15
Case: 11-30387 Document: 00511932132 Page: 16 Date Filed: 07/24/2012
No. 11-30387
attempt with the specific intent to defraud the United States. See Fretz, 244
F.3d at 1330.
Here, Curtis indisputably had a duty to pay the relevant taxes. It is also
undisputed that he demonstrated his knowledge of that duty by filing tax
returns for the relevant tax years that expressly acknowledged his outstanding
tax liabilities. Further, Curtis pleaded guilty in criminal proceedings to
committing the acts which we have determined satisfied § 523(a)(1)(C)’s conduct
requirement, and he specifically acknowledged in the factual basis supporting
his plea that he (a) structured transactions during the relevant tax years to
avoid the federal reporting requirements and (b) attempted to interfere with the
grand jury’s investigation of his activities. Thus, he necessarily admitted to
voluntarily and intentionally committing the affirmative acts that we have
concluded were attempts to evade or defeat the collection and payment of his tax
liabilities for the relevant years. See Wolfson v. Baker, 623 F.2d 1074, 1077–78
(5th Cir. 1980) (holding that in both civil and criminal cases collateral estoppel
“bars relitigation of an issue actually and necessarily decided in a prior action”).
It does not matter if he did not commit those acts with the specific intent to
defeat the collection of his taxes. See Fretz, 244 F.3d at 1330.
2
For similar reasons, we conclude that Barbara willfully attempted to evade
or defeat her tax liabilities for the 1996–2001 tax years under § 523(a)(1)(C).
First, under the totality of the circumstances, Barbara’s attempt to
interfere with the Government’s investigation of Curtis’s activities satisfied §
523(a)(1)(C)’s conduct requirement. In the factual basis supporting her guilty
plea to obstruction of justice, Barbara admitted that (1) Martino paid the
runners at the direction and instructions of Curtis “and with [Barbara’s] full
knowledge” and that (2) “on numerous occasions [both Coneys] instructed Ms.
Martino to feign ignorance in response to any grand jury questions regarding the
16
Case: 11-30387 Document: 00511932132 Page: 17 Date Filed: 07/24/2012
No. 11-30387
specific operations of [CLS], including using runners and paying them through
structured transactions.” Accordingly, when Barbara attempted to influence
Martino’s grand jury testimony, Barbara necessarily knew that Martino was
structuring the firm’s cash withdrawals at Curtis’s direction in a manner that
would avoid the currency transaction reporting requirements. See Wolfson, 623
F.2d at 1077–78 (describing operation of collateral estoppel).
As stated previously, Curtis’s efforts to avoid the currency transaction
reporting requirements constituted an attempt to evade or defeat the collection
and payment of his taxes. Barbara sought to further conceal Curtis’s activities
from the Government by attempting to persuade Martino to lie to the grand jury
regarding the runner payments and the structuring efforts undertaken to avoid
detection of those payments. As we held regarding Curtis’s obstruction of justice
offense, Barbara’s effort to influence Martino’s testimony likewise was an
attempt to evade or defeat the payment or collection of her taxes under these
circumstances—i.e., because the currency transaction reporting requirements
would have greatly assisted the IRS with collecting the Coneys’ tax liabilities.
Thus, Barbara’s efforts to persuade Martino to testify falsely to the grand jury
constituted an affirmative act to defeat the collection and payment of her taxes,
thereby satisfying § 523(a)(1)(C)’s conduct requirement. See Fretz, 244 F.3d at
1329 (“The conduct requirement is satisfied, however, where a debtor engages
in affirmative acts to avoid payment or collection of taxes . . . .”) (citation
omitted).
Second, Barbara’s attempt to evade or defeat her taxes for the relevant
years satisfied all three prongs of § 523(a)(1)(C)’s mental state requirement.
Bruner, 55 F.3d at 197. It is undisputed that Barbara had a duty to pay the
relevant taxes. However, Barbara contends that even though she signed the
couple’s joint tax returns for the relevant years, she did not know she had a duty
17
Case: 11-30387 Document: 00511932132 Page: 18 Date Filed: 07/24/2012
No. 11-30387
to pay those taxes because she was not involved in the couple’s finances and
Curtis had told her that he had paid the couple’s tax liabilities. We disagree.
In certain cases, a taxpayer may be unaware of his duty to pay taxes,
despite the fact that he filed a tax return during the relevant tax year. For
instance, in Birkenstock, the Seventh Circuit held that a wife lacked knowledge
of her duty to pay certain taxes—even though she had signed joint tax returns
for the years in question—because she had no reason to believe that her husband
had improperly imputed certain income to a family trust. Birkenstock, 87 F.3d
at 953. Here, however, the Coneys’ tax returns expressly indicated the couple’s
outstanding tax liabilities. Thus, Barbara’s signature on the returns confirms
her knowledge of her duty to pay the relevant taxes.
Nevertheless, Barbara maintains that Curtis told her that he had
subsequently paid some of the couple’s outstanding taxes for the relevant years,
thereby negating her knowledge of her duty to pay the relevant taxes. We find
this argument unpersuasive. At her deposition, Barbara admitted that by 1999,
she knew that the IRS was attempting to collect the couple’s outstanding tax
liabilities. Thus, when she attempted to influence Martino’s grand jury
testimony in 2002, Barbara had knowledge of her outstanding tax liabilities and
her corresponding duty to pay those liabilities.
Lastly, we conclude that Barbara’s actions satisfied the third prong of §
523(a)(1)(C)’s mental state requirement—i.e., she voluntarily and intentionally
violated her duty to pay her taxes. Bruner, 55 F.3d at 197; Fretz, 244 F.3d at
1330. Barbara pleaded guilty to a count of obstruction of justice based on her
attempt to interfere with Martino’s testimony and admitted that she committed
that offense with “full knowledge” of Curtis’s activities. Thus, Barbara
necessarily attempted to influence Martino’s grand jury testimony voluntarily
and intentionally. Because we have concluded that Barbara’s obstruction of
justice offense was an attempt to evade or defeat the collection and payment of
18
Case: 11-30387 Document: 00511932132 Page: 19 Date Filed: 07/24/2012
No. 11-30387
her tax liabilities for the relevant tax years, Barbara voluntarily and
intentionally violated her duty to pay her taxes. It does not matter if she did not
make her attempt to evade or defeat her taxes with the specific intent to defeat
the collection of her taxes. Fretz, 244 F. 3d at 1330.4
Accordingly, we conclude that the district court did not err when it
concluded that the Coneys’ tax liabilities for the tax years 1996–2001 were
excepted from the bankruptcy court’s discharge order under 11 U.S.C. §
523(a)(1)(C).
C
Alternatively, Barbara contends that the district court erred in awarding
the Government a money judgment. She further claims that even if a money
judgment was proper, the court awarded judgment in an improper amount.
Because her challenges to the district court’s judgment and its calculation of
interest turn on questions of law, we review them de novo. See Trans-Serve, Inc.
v. United States, 521 F.3d 462, 468 (5th Cir. 2008).
Barbara’s arguments are unpersuasive. First, she offers no support for her
argument that the district court should have refrained from awarding a money
judgment. Regardless, the district court had the authority to award a money
judgment. See 26 U.S.C. § 7402.
4
Barbara also appears to contend that neither she nor Curtis could have willfully
attempted to evade or defeat their taxes because they lacked the ability to pay their tax
liabilities. She asserts that the district court erroneously found that the couple could have
used the money they illegally paid to runners to satisfy the entirety of their tax liabilities. But
whether a debtor had the ability to pay his taxes is only one “appropriate factor” we employ
when deciding whether a debtor “willfully attempted” to evade or defeat their taxes. In re
Grothues, 226 F.3d 334, 339 (5th Cir. 2000) (“As to the lack of a finding that the Grothues had
the ability to pay the taxes, the key § 523(a)(1)(C) determination is whether debtor’s conduct
is willful. Whether debtor has the ability to pay is, of course, an appropriate factor in making
that determination, but it is not a litmus test.”). Here, given the Coneys’ substantial income
during the relevant tax years and the reasons stated above, we conclude that both Coneys
willfully attempted to evade or defeat their taxes, even if the Government did not establish as
a matter of law that the couple could have paid every cent of their tax liabilities if they had
chosen to.
19
Case: 11-30387 Document: 00511932132 Page: 20 Date Filed: 07/24/2012
No. 11-30387
Second, Barbara alternatively makes two challenges to the amount of the
district court’s judgment. On the one hand, by contending that a proper
judgment would have been in the amount of $1,311,729—the amount of the
couple’s unpaid tax liability exclusive of interest or any penalties—Barbara
implicitly argues that the judgment should not have assessed any interest on her
outstanding tax liabilities. However, the Internal Revenue Code clearly requires
Barbara to pay interest on her unpaid tax liabilities for the period from the date
they were due to the date of payment. See 26 U.S.C. § 6601(a); 28 U.S.C. §
1961(c)(1).
On the other hand, Barbara contends that even if the district court could
have awarded interest on the couple’s unpaid tax liabilities, the district court
improperly calculated that interest. She asserts that the district court
erroneously combined the couple’s tax liabilities for six different tax years into
one sum. She argues that tax liabilities from different years should not be
lumped into one sum because interest would accrue upon interest and “interest
accrues at different rates on the liabilities over the different years.” Barbara’s
arguments are misguided. The Internal Revenue Code provides that post-
judgment interest is compounded daily; hence, there is no prohibition on
“interest accruing upon interest.” 26 U.S.C. § 6622. Moreover, combining the
couple’s tax liabilities from different years into one judgment does not have any
effect on the calculation of interest. While it is true that the underpayment
interest rate changes over time, the Government adjusts that rate quarterly and
the underpayment rate is therefore the same for any given quarter regardless
of when the underpayment occurred. Id. § 6621(a)(2), (b).
The Government provided the district court with detailed interest
calculations, and Barbara has not pointed to any evidence that calls its
calculations into question. Accordingly, we conclude that the district court did
20
Case: 11-30387 Document: 00511932132 Page: 21 Date Filed: 07/24/2012
No. 11-30387
not err in awarding judgment for the Government in the amount of
$2,687,408.59.
D
Barbara also claims that the district court abused its discretion by
denying two motions she filed in the lower court to strike three statements in the
Government’s summary judgment filings. Two of the statements alleged that
CLS filed fraudulent tax returns for the relevant tax years, and the other alleged
that the Coneys’ tax attorneys assisted the couple in filing false and inaccurate
returns. Barbara contends that the district court should have stricken the
disputed statements because of their scandalous and prejudicial nature and
because they impermissibly expanded the pleadings by advancing a new
allegation of fraud.
We review a district court’s ruling on a motion to strike for abuse of
discretion. Cambridge Toxicology Grp., Inc. v. Exnicios, 495 F.3d 169, 178 (5th
Cir. 2007).5 Federal Rule of Civil Procedure 12(f) provides that a district court
“may strike from a pleading . . . any redundant, immaterial, impertinent, or
scandalous matter.” The district court denied Barbara’s motions to strike as
moot, determining that the disputed pleadings were “unrelated to the
undisputed facts that support[ed]” its order granting summary judgment for the
Government. Coney, 2011 WL 1103631, at *2, n.5. But even though the
disputed pleadings were not related to the grounds upon which the district court
granted summary judgment, they were not immaterial or impertinent to the
controversy itself. See Augustus v. Bd. of Pub. Instruction of Escambia Cnty.,
Fla., 306 F.2d 862, 868 (5th Cir. 1962) (holding “that the action of striking a
5
We assume without deciding that Barbara could file a motion to strike the
Government’s summary judgment filings pursuant to Rule 12(f). Cf. 5C Charles Alan Wright
et al., FEDERAL PRACTICE & PROCEDURE § 1380 & n.8.5 (3d ed. 2012) (“Rule 12(f) motions only
may be directed towards pleadings as defined by Rule 7(a); thus motions, affidavits, briefs, and
other documents outside of the pleadings are not subject to Rule 12(f).”)
21
Case: 11-30387 Document: 00511932132 Page: 22 Date Filed: 07/24/2012
No. 11-30387
pleading should be sparingly used by the courts” and that “motion[s] to strike
should be granted only when the pleading to be stricken has no possible relation
to the controversy”) (quoting Brown & Williamson Tobacco Corp. v. United
States, 201 F.2d 819, 822 (6th Cir. 1953)). Here, the disputed statements were
material and pertinent to the underlying controversy because filing a fraudulent
tax return is an alternative basis for nondischargeability under 11 U.S.C. §
523(a)(1)(C).
Similarly, we reject Barbara’s contention that the disputed pleadings were
“scandalous.” Although the disputed pleadings might “offend[] the sensibilities”
of Barbara and her attorneys, those pleadings are not scandalous because they
are directly relevant to the controversy at issue and are minimally supported in
the record. See In re Gitto Global Corp., 422 F.3d 1, 12 (1st Cir. 2005) (holding
that a pleading is not “scandalous” under Rule 12(f) merely because “the matter
offends the sensibilities of the objecting party if the challenged allegations
describe acts or events that are relevant to the action[;] [a]s a result, courts have
permitted allegations to remain in the pleadings when they supported and were
relevant to a claim for punitive damages”) (quoting Hope ex rel. Clark v. Pearson,
38 B.R. 423, 424–25 (Bankr. M.D. Ga. 1984)). Thus, the district court did not
abuse its discretion by denying Barbara’s two motions to strike statements
contained in the Government’s summary judgment filings.
III
For the foregoing reasons, we AFFIRM the judgment of the district court.
22